Reyes v. Sessions

• Court: District Court, District of Columbia
• Decided: September 28, 2018
• Docket: Civil Action No. 2017-1643
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

GREGORY L. REYES Plaintiff, v. Civil Action No. 17-1643 (JDB) JEFF SESSIONS, in his official capacity as Attorney General of the United States, et al., Defendants.

MEMORANDUM OPINION

Before the Court is [10] the government’s motion to dismiss the as-applied statutory and

constitutional challenges brought by plaintiff Gregory Reyes to certain provisions of the federal

criminal prohibition on possession of firearms by felons. Eight years ago, Reyes was convicted of

violations of the Securities Exchange Act of 1934 (the “Exchange Act”) and sentenced to eighteen

months in prison. He now wishes to obtain a firearm but has been prevented from doing so by 18

U.S.C. § 922(d)(1) and (g)(1), which prohibit the transfer of firearms to and possession of firearms

by individuals convicted of a “crime punishable by imprisonment for a term exceeding one year.”

This category of crimes, however, is statutorily defined to exclude “offenses pertaining to antitrust

violations, unfair trade practices, restraints of trade, or other similar offenses relating to the

regulation of business practices.” 18 U.S.C. § 921(a)(20)(A). Because the Court finds that

Reyes’s convictions fall within this exception, the Court will deny the government’s motion to

dismiss. BACKGROUND

I. STATUTORY BACKGROUND

Enacted in 1938, the first federal firearm disqualification statute initially prohibited the sale

of firearms to and possession of firearms by felons and misdemeanants convicted of a “crime of

violence,” which was statutorily defined to include offenses such as murder, rape, mayhem, and

burglary. See Federal Firearms Act, Pub. L. No. 75-785, §§ 1(6), 2(d), (f), 52 Stat. 1250, 1250–

51 (1938). In 1961, Congress expanded the scope of these prohibitions to sweep in non-violent

criminals, amending the prohibited class to include any person convicted of a “crime punishable

by imprisonment for a term exceeding one year.” See An Act to Strengthen the Federal Firearms

Act, Pub. L. No. 87-342, 75 Stat. 757, 757 (1961).

Seven years later, Congress passed the Gun Control Act and again redefined the class of

individuals disqualified from possessing firearms. See Pub. L. No. 90-618, 82 Stat. 1213 (1968).

The Act, as amended and codified in part at 18 U.S.C. § 922(g)(1), prohibits any individual who

has been convicted of “a crime punishable by imprisonment for a term exceeding one year” from

transporting or receiving “any firearm or ammunition which has been shipped or transported in

interstate or foreign commerce.” A corollary provision, 18 U.S.C. § 922(d)(1), makes it unlawful

“to sell or otherwise dispose of any firearm or ammunition to any person” who “has been convicted

in any court of[] a crime punishable by imprisonment for a term exceeding one year[.]”

Under the Gun Control Act, however, not all individuals convicted of a felony are

disqualified from acquiring or possessing firearms. The term “crime punishable by imprisonment

for a term exceeding one year” is defined statutorily by 18 U.S.C. § 921(a)(20)(A) to exclude

“certain commercial-type crimes,” S. Rep. No. 90-1097, at 112–13 (1968), reprinted in 1968

U.S.C.C.A.N. 2112, 2202. Specifically, the Gun Control Act provided that the term did not include

2 “Federal or State offenses pertaining to antitrust violations, unfair trade practices, restraints of

trade, or other similar offenses relating to the regulation of business practices as the Secretary [of

the Treasury] may by regulation designate.” Pub. L. No. 90-618, § 921(a)(20)(A), 82 Stat. 1213,

1216 (1968). Ultimately, the Secretary never designated any “similar offenses” as excluded, and

in 1986 Congress eliminated from the definition the phrase, “as the Secretary may by regulation

designate.” See Firearms Owners’ Protection Act, Pub. L. No. 99-308, 100 Stat. 449, 449 (1986).

All “other similar offenses relating to the regulation of business practices” were thus excluded

from the definition of a “crime punishable by imprisonment for a term exceeding one year,” and

it was left to the courts to identify which offenses fell within this “business practices” exception.

See S. Rep. No. 98-583, at 7 (1984) (noting that the Firearm Owners’ Protection Act “makes the

court, rather than the Secretary, the final arbiter as to what constitutes a ‘similar offense relating

to the regulation of business practices’”).

II. FACTUAL BACKGROUND

Eight years ago, Reyes came within the potential ambit of the felon-in-possession statute

when he was convicted of certain offenses punishable by more than one year of imprisonment.

From 1998 to 2005, Reyes was the Chief Executive Officer of Brocade Communications Systems,

Inc. (“Brocade”), a publicly traded company. United States v. Reyes, 660 F.3d 454, 459–60 (9th

Cir. 2011). The company offered stock options to new and existing employees that gave them the

right to purchase Brocade stock at a fixed (strike) price on or after a particular date. Id. at 459.

Brocade backdated these options, recording the grant date retroactively so that the strike price was

below the stock’s then-current market value and thus was instantly profitable to the option-holder.

Id. Although this practice was not illegal in and of itself, the company was required to record these

employment benefits as non-cash compensation expenses in the company’s financial records. Id.

3 But Brocade failed to account for these expenses, and Reyes was subsequently charged with

various violations of the Exchange Act. Id.

In 2010, Reyes was convicted of (1) securities fraud and making false filings with the

Securities and Exchange Commission (“SEC”) in violation of 15 U.S.C. §§ 78j(b) and 78(ff), and

17 C.F.R. § 240.10b–5; (2) falsifying corporate books and records in violation of 15 U.S.C.

§§ 78m(b)(2)(A) and 78ff, and 17 C.F.R. § 240.13b2–1; and (3) making false statements to

auditors in violation of 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2–2. Id. Each of these crimes

carries a maximum prison sentence of twenty years. 15 U.S.C. § 78ff. Reyes ultimately was

sentenced to eighteen months in prison, two years of supervised release, and was fined $15 million.

Reyes, 660 F.3d at 460.

Reyes now wishes “to acquire and possess . . . firearms for defense of himself and his

family and for hunting.” Compl. [ECF No. 1] ¶ 28. Although his right to possess a firearm has

been restored under the laws of his home state of Montana, he alleges that the government’s

interpretation and application of the federal felon-in-possession statute effectively prevents him

from purchasing a firearm. Id. ¶¶ 27, 29–34. Because the government instructs firearms dealers

not to sell to anyone who has “been convicted in any court of a felony, or any other crime for

which the judge could have imprisoned [him] for more than one year,” Reyes asserts that sellers

are unable to provide him with a firearm. Compl. ¶¶ 25–26, 31 (quoting U.S. Dep’t of Justice,

Bureau of Alcohol, Tobacco, Firearms & Explosives (“ATF”), Firearms Transaction Record: ATF

E-Form 4473 (Oct. 2016)). Indeed, Reyes alleges that two merchants specifically informed him

that they would be unwilling to make such a sale to him due to his felony convictions. Id. ¶¶ 31–

32. Moreover, even if Reyes could obtain a firearm from a licensed federal firearms dealer or a

private party, he asserts that he has refrained from attempting to do so because he believes the

4 government would subject him to criminal penalties under 18 U.S.C. § 922(g)(1). Id. ¶¶ 30, 32–

34. Reyes thus claims he is effectively barred from acquiring a firearm.

III. PROCEDURAL HISTORY

In August 2017, Reyes filed the instant action bringing as-applied statutory and

constitutional challenges to 18 U.S.C. § 922(d)(1) and (g)(1). He first claims that he is statutorily

exempted from § 922(d)(1) and (g)(1) because his convictions constitute business practices

offenses excluded under § 921(a)(2)(A) (Count I). Compl. ¶¶ 4, 36–37. In the alternative, he

asserts two claims under the Equal Protection Clause of the Fifth Amendment, alleging that the

statute creates two impermissible distinctions: first, between federal offenders convicted, like him,

of securities and accounting offenses who are barred from possessing firearms and federal

offenders convicted of “business practices” offenses who are excepted from the felon-in-

possession statute (Count II), id. ¶¶ 5, 39–41; and second, between citizens convicted of non-

violent crimes who do not “pose[] any greater risk to public safety[] than a typical law-abiding

citizen” but are disqualified from firearm possession and other citizens not subject to § 922(d)(1)

and (g)(1) (Count III), id. ¶¶ 6, 43–45. Reyes also claims in the alternative that the firearms

disability fails heightened judicial scrutiny under the Second Amendment because he was

convicted of non-violent offenses (Count IV). Id. ¶¶ 7, 47–49. For all counts, he seeks declaratory

and injunctive relief barring the government from enforcing § 922(d)(1) and (g)(1) against him

based on his 2010 convictions. Id. at 14–15.

The government now moves to dismiss Reyes’s claims. See Defs.’ Mot. to Dismiss

(“Gov’t’s Mot.”) [ECF No. 10]. It argues that: (1) Reyes does not have Article III standing to

challenge § 922(d)(1), see id. at 9–10; (2) his predicate convictions do not fall within the statutory

exception to the firearms disability, see id. at 10–16; (3) Reyes is not within the scope of the Second

5 Amendment’s protections because he was convicted of serious crimes and, even if the Second

Amendment does apply, the statutory restrictions satisfy intermediate scrutiny, see id. at 16–26;

and (4) his Equal Protection claims fail because the felony classification, including its exception

for certain business practices offenses, satisfies both rational basis and heightened scrutiny, see id.

at 26–28. Also pending before the Court is Reyes’s motion for leave to file a surreply addressing

one of the government’s Equal Protection arguments. See Pl’s Mot. to File a Surreply in Opp’n to

Defs.’ Mot. to Dismiss [ECF No. 16]. The government’s motion to dismiss and Reyes’s related

motion for leave to file a surreply are now fully briefed and ripe for decision.

LEGAL STANDARD

Defendants have moved to dismiss this case for failure to state a claim under Rule 12(b)(6)

and, in part, for lack of subject-matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1).

To survive a motion to dismiss under Rule 12(b)(6), a complaint must “contain sufficient factual

matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To

survive a motion to dismiss for lack of standing under Rule 12(b)(1), a plaintiff must demonstrate

that he has standing by pleading facts that, taken as true, render it plausible that the Court has

subject-matter jurisdiction. See Humane Soc’y of the U.S. v. Vilsack, 797 F.3d 4, 8 (D.C. Cir.

2015). For motions brought under both Rules, the Court must accept as true all facts stated in the

complaint, but it is not bound to “legal conclusion[s] couched as . . . factual allegation[s].” Iqbal,

556 U.S. at 678.

6 DISCUSSION

I. REYES HAS STANDING TO CHALLENGE § 922(D)(1)

As a preliminary matter, the Court addresses the government’s assertion that Reyes does

not have standing to challenge 18 U.S.C. § 922(d)(1). To establish standing, a plaintiff must allege

three elements: (1) an “injury in fact,” which is “concrete and particularized” and “actual or

imminent”; (2) that the injury is fairly traceable to the challenged provision and (3) that the injury

is likely to be redressable by the court. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).

Reyes alleges that § 922(g)(1), which prohibits firearm possession by certain felons, and

§ 922(d)(1), which prohibits the sale and transfer of firearms to certain felons, together prevent

him from acquiring a firearm. The government disputes only whether Reyes has suffered a

cognizable injury from the application of § 922(d)(1), arguing that only an individual transferring

or selling a firearm—not a would-be purchaser or recipient—suffers a potential injury in fact from

the application of the seller provision. See Gov’t’s Mot. at 9–10. Because Reyes does not allege

that he wishes to transfer or sell a firearm, the government contends that he cannot satisfy the first

element of standing—an injury in fact—to assert his § 922(d)(1) claims.

But the government’s position is inconsistent with both common sense and longstanding

precedent. Even if Reyes successfully challenged § 922(g)(1) and was deemed able lawfully to

possess a firearm, it would be a hollow victory if others were legally prohibited from providing

him with one. As courts have long recognized, restrictions on providers can cause cognizable

injuries to would-be recipients who are prevented from accessing goods and services in which they

have a legally protected interest. See, e.g., Va. State Bd. of Pharm. v. Va. Citizens Consumer

Council, Inc., 425 U.S. 748, 757 (1976) (finding prospective consumers had standing to bring

constitutional challenge to restrictions on drug advertisers); Roe v. Wade, 410 U.S. 113, 124–25

7 (1973) (holding pregnant woman had standing to challenge statute prohibiting the administration

of abortions). Reyes need not allege that he is prevented from selling a firearm because he alleges

a different, concrete and actual injury caused by § 922(d)(1): the injury of not being able to

purchase or obtain firearms.

Well-settled law supports this finding. In Dearth v. Holder, for instance, the D.C. Circuit

held that a would-be purchaser suffered a “sufficiently real and immediate” injury from two

provisions of § 922 that prohibited the sale of firearms to and purchase of firearms by individuals

residing outside the United States. 641 F.3d 499, 500, 503 (D.C. Cir. 2011). Noting that the two

laws “together make it impossible . . . lawfully to purchase a firearm,” the D.C. Circuit found that

a would-be purchaser of firearms had standing to challenge the provisions because they “thwarted

[his] best efforts to acquire a firearm.” Id. at 500, 502; see also Nat’l Rifle Ass’n of Am., Inc. v.

Bureau of Alcohol, Tobacco, Firearms, and Explosives, 700 F.3d 185, 191–92 (5th Cir. 2012)

(“[B]y prohibiting [firearm licensees] from selling handguns to 18-to-20-year-olds, [18 U.S.C.

§ 922(b)(1) and (c)(1)] cause those persons a concrete, particularized injury—i.e. the injury of not

being able to purchase handguns from [firearm licensees].”); cf. Ezell v. City of Chicago, 651 F.3d

684, 689–90, 695 (7th Cir. 2011) (noting that city ordinance banning firing-ranges “interferes with

[the gun owners’] right to possess firearms for self-defense,” which “easily support[s] Article III

standing” when range training was a prerequisite to gun ownership). Like the plaintiff in Dearth,

Reyes alleges that he is injured by provisions of § 922 which together prevent him from acquiring

a firearm.1 Hence, both common sense standing principles and binding precedent compel the

1 The government attempts to distinguish Dearth by highlighting the court’s analysis of whether a would-be purchaser must first be denied a firearm permit to be injured. See Defs.’ Reply in Supp. of Mot. to Dismiss (“Gov’t’s Reply”) [ECF No. 15] at 3 n.1. But the D.C. Circuit ultimately held that a permit denial was not required because the would-be purchaser’s injury stemmed from “‘statutory classifications’ that bar him from acquiring a firearm.” Dearth, 641 F.3d at 502 (citation omitted). So too here, where sellers are prevented from transferring a firearm to Reyes because of his felon status. 8 Court to conclude that Reyes has pleaded sufficient facts to establish an injury in fact for purposes

of standing to challenge § 922(d)(1). 2

II. COUNT I: STATUTORY EXCLUSION UNDER § 921(A)(20)(A)

Having found that Reyes has standing to challenge 18 U.S.C. § 922(d)(1), the Court must

now determine whether the prohibitions in 18 U.S.C. § 922(d)(1) and (g)(1) apply to exclude him

from procuring or possessing a firearm. Reyes alleges that he falls within the “business practices”

exception to the definition of “a crime punishable by imprisonment for a term exceeding one year”

because he was convicted of “offenses pertaining to antitrust violations, unfair trade practices,

restraints of trade, or other similar offenses relating to the regulation of business practices.” Pl.’s

Mem. of P. & A. in Opp’n to Defs.’ Mot. to Dismiss (“Pl.’s Opp’n”) [ECF No. 13] at 8 (quoting

18 U.S.C. § 921(a)(20)(A)). More specifically, Reyes contends that each of his predicate

offenses—(1) securities fraud, (2) falsifying corporate books and records, and (3) making false

statements to auditors—“pertain to” or “are similar to” unfair trade practices and hence are

excluded from the class of convictions that trigger application of § 922(g)(1) and (d)(1). See Pl.’s

Opp’n at 11.

The government argues that the business practices exception only encompasses those

offenses that possess the same quality that, it asserts, unites the enumerated offenses: proof of

direct economic harm to competition or consumers. Gov’t’s Mot. at 11. To determine whether a

2 Given the D.C. Circuit’s clear holding in Dearth, this Court need not consider opinions from courts in other Circuits. In any event, the government misreads two of the cases it cites in opposition. See Gov’t’s Mot. at 10 (first citing Lane v. Holder, 703 F.3d 668, 672 (4th Cir. 2012), then citing Bezet v. United States, No. 17-30303, 2017 WL 4876311 (5th Cir. Oct. 27, 2017)). In Lane, the Fourth Circuit held that the challenged firearm regulations merely created “minor inconveniences” for gun purchasers that were “distinct from an absolute deprivation” of the Second Amendment right to bear arms, and hence plaintiffs did not have standing to challenge them. 703 F.3d at 673 (comparing the relatively minor regulations in Lane with the more onerous regulations in Ezell and Dearth). The Fifth Circuit in Bezet made the same distinction, holding that tax and registration laws did not cause a sufficiently concrete indirect injury to a consumer because the laws merely created “additional costs and logistical hurdles” to the receipt of transferred guns. See 2017 WL 4876311, at *340. Hence, neither court found that a plaintiff in Reyes’s position lacks standing to challenge a law that creates an absolute bar on his ability to obtain a firearm. 9 predicate conviction is “similar” to an enumerated offense, the government suggests the Court

adopt the “elements test” employed by some circuits. Id. at 12. Under the elements test, a

conviction qualifies as similar if the government was required to prove as an element of the offense

that the defendant caused economic harm to consumers or competition. Id. at 11. Because none

of Reyes’s predicate offenses had such an element, the government contends that the offenses do

not qualify as “similar” under § 921(a)(20)(A). Id. at 13.3

Reyes, conversely, interprets the business practices exception more broadly. He contends

that Congress intended to exclude from the firearms disability a “broad class” of “business

practices that cause harm to the fair and efficient functioning of the commercial marketplace,”

regardless of whether the offenses at issue have as an element proof of economic harm to

consumers or competition. Pl.’s Opp’n at 9, 17. Relying on the history and purpose of securities

regulation as well as the elements of his offenses, he asserts that his predicate offenses specifically

“pertain” to or are “similar” to unfair trade practices and thus fall within the statutory exclusion.

Id. at 11. In the alternative, he argues that his offenses nevertheless satisfy the elements test the

government proposes. Id. at 18–20.

3 The government also argues that the fact that federal securities laws were enacted prior to the Gun Control Act weighs against finding that securities violations fall within the business practices exception. See Gov’t’s Reply at 12. Under the government’s theory, any non-enumerated offense that existed prior to the enactment of the Gun Control Act cannot fall within the business practices exception because Congress chose not to identify the offense explicitly in § 921(a)(20)(A). See id. But Congress’s initial delegation of authority to the Secretary to designate additional similar offenses was not limited to newly enacted offenses. See Pub. L. No. 90-618, § 921(a)(20)(A), 82 Stat. 1213, 1216 (1968). And when the provision was amended in 1986 to eliminate the phrase, “as the Secretary may by regulation designate,” it did not include a temporal limit on which convictions could be deemed “similar” to the enumerated offenses. See Firearms Owners’ Protection Act, Pub. L. No. 99-308, 100 Stat. 449, 449 (1986). Similarly, the government suggests that the specific exclusion of antitrust violations, which were not federal felonies at the time, demonstrates that Congress did not intend to exclude other offenses that were federal felonies at the time. See Gov’t’s Reply at 22 n.22. But the very purpose of the business practices exception was to except certain felonies—i.e. “crimes punishable by imprisonment for a term exceeding one year”—from the statutory definition. Moreover, § 921(a)(20)(A) excludes both “Federal or State offenses,” suggesting that Congress contemplated that some federal offenses could fall within the business practices exception. 10 In determining the scope of the business practices exception, the Court begins, as it must,

with the text of the statute. See Kingdomware Techs., Inc. v. United States, 136 S. Ct. 1969, 1976

(2016); W. Minn. Mun. Power Agency v. Fed. Energy Regulatory Comm’n, 806 F.3d 588, 591

(D.C. Cir. 2015). In this case, the statutory language of § 921(a)(20)(A) is clear: it only excludes

“antitrust violations, unfair trade practices, and restraints of trade” and “offenses relating to the

regulation of business practices” that are “similar” to the three enumerated offenses. See United

States v. Stanko, 491 F.3d 408, 414 (8th Cir. 2007) (noting that the inclusion of the word “similar”

“indicates an intent to limit the business practices clause’s reach to offenses which are

‘comparable’ or ‘nearly corresponding’ to the enumerated offenses” (quoting Webster’s Third

New Int’l Dictionary 2120 (2002) and United States v. Lindsey, 782 F.2d 116, 117–118 (8th Cir.

1986) (per curiam))). To be “similar” to the enumerated offenses of antitrust violations, unfair

trade practices, and restraints of trade, an offense must share some common quality. Other courts

have found—and this Court agrees—that the common thread that unites the enumerated offenses

and those offenses similar to them is that they are commercial offenses that address “economic

harm to competition or consumers.” Id. at 416; see also United States. v. Coleman, 609 F.3d 699,

708 (5th Cir. 2010) (“These exempted offenses demonstrate that Congress intended to exclude

under § 921(a)(20)(A) only commercial crimes violating statutes designed to prevent ‘an adverse

economic effect on competition or consumers.’” (citation omitted)). Hence, Reyes’s predicate

offenses only qualify as excluded offenses under § 921(a)(20)(A) if the violated statutes relate to

the regulation of business practices and are intended to address economic harm to competition or

consumers.4

4 Reyes suggests that the Court should apply the rule of lenity to resolve any ambiguity in the statute in his favor. See Pl.’s Opp’n at 16–17. Here, however, Congress “has spoken in clear and definite language.” Scheidler v. Nat’l Org. for Women, Inc., 537 U.S. 393, 409 (2003). Moreover, even if the statute were ambiguous, courts “do not 11 The statutory question before the Court, then, is twofold: (1) what factors evince that a

commercial offense statute addresses economic harm to competition or consumers and (2) do

Reyes’s predicate offenses in fact address such harms. The Court considers each of these questions

in turn.

A. Identifying the Business Practices Exception Test

Although application of the business practices exception is a matter of first impression in

this Circuit, this Court does not write on a blank page. The elements test, which the government

proposes this Court adopt, originated in the Second Circuit in United States v. Meldish, 722 F.2d

26, 28 (2d Cir. 1983). At that time, the exclusion of “other similar offenses relating to the

regulation of business practices” was left to the Secretary and hence a predicate offense could only

qualify for exclusion if it constituted an enumerated offense under § 921(a)(20)(A). In Meldish,

the Second Circuit considered whether falsifying a customs declaration constituted an “unfair trade

practice” and held that “implicit in the term is the requirement that the practice adversely affect

either competitors or consumers.” Id. at 27–28. Because the elements of the customs offense

demonstrated that it “in no way depends on whether it has an effect” on either competitors or

consumers, the court found that the offense did not fall within § 921(a)(20)(A)’s exception. Id. at

28.

Since then, Circuits applying the business practices exception have split in their use of the

elements test. The Seventh Circuit relies exclusively on the elements test, only excluding offenses

from the felon-in-possession statute if “the government would have been required to prove, as an

element of the predicate offense, that competition or consumers were affected.” United States v.

Schultz, 586 F.3d 526, 530 (7th Cir. 2009). The Fifth Circuit has examined both the elements of

resort to the rule of lenity where, as here, we can otherwise resolve the ambiguity of the statute.” Stanko, 491 F.3d at 414 n.5 (citation omitted). 12 the predicate offense and its legislative history in determining whether it falls within the business

practices exception, though it maintains that any analysis of the latter is secondary to an

examination of the former. See Coleman, 609 F.3d at 705–06. But see Dreher v. United States,

115 F.3d 330, 332–33 (5th Cir. 1997) (examining only the elements).

The Eighth Circuit has taken a more holistic approach to the business practices exception

inquiry, considering both the primary purpose of the violated statute and the elements of the

predicate offense in determining whether the predicate offense constitutes an excluded offense. In

United States v. Stanko, the Eighth Circuit considered whether a violation of the Federal Meat

Inspection Act (“FMIA”) pertained to unfair trade practices or other similar offenses. It concluded

that “Congress intended to exclude from § 922(g)(1)’s prohibition those felons convicted under

criminal statutes addressing only economic harm to competition or consumers, but not to exclude

those felons convicted under criminal statutes designed primarily to address other societal

concerns.” Stanko, 491 F.3d at 416. Whether a commercial offense statute constitutes a qualifying

offense under the business practices exception is “evidenced by the primary purpose of the criminal

statute and the elements the Government must prove for conviction under it.” Id. at 415. 5 Because

the primary purpose of the FMIA was to protect public health and the violations did not require

the government to prove an effect on competition or consumers, the court found that the predicate

5 The government suggests that the “primary consideration” in Stanko was its analysis of the elements of the predicate offenses. See Gov’t’s Reply at 10. Although the Eighth Circuit does note that, “[e]ven more significantly, none of the provisions of the FMIA require the Government to prove an effect on competition or consumers,” it does so only within an extensive review of the statute’s primary purpose. See Stanko, 491 F.3d at 417–18. Throughout the opinion, the court makes clear that both “the primary purpose of the criminal statute and the elements the Government must prove for conviction under it” constitute evidence of whether the predicate offense qualifies under the business practices exception. See id. at 415; see also id. at 418–19. It also cites approvingly United States v. McLemore, 792 F. Supp. 96, 98 (S.D. Ala. 1992)—the only case to hold that a predicate offense qualified under the business practices exception—which expressly rejected the elements test and instead looked solely to the purpose of the statute and its placement in Title 15 of the United States Code. See Stanko, 491 F.3d at 415. Hence, it is clear in Stanko that an analysis of the elements of the offense is one—but not the exclusive—consideration for application of the business practices exception. 13 violation of FMIA was not excluded under the business practices exception. Id. at 418–19; see

also United States v. Miller, 678 F.3d 649, 652–53 (8th Cir. 2012) (finding scheme to defraud was

not a qualifying excluded offense because the violated statute did “not have the isolated purpose

of protecting consumers or regulating business practices” and the elements of the offense did “not

involve showing an effect upon consumers or competition”).

The government urges the Court to adopt the narrow “elements test” used by the Seventh

Circuit or, at the very least, to adhere to the Fifth Circuit’s approach by subordinating any

consideration of purpose to an examination of the elements of the offense. See Gov’t’s Mot. at

11–12. In doing so, it suggests that “the only underlying offenses that may be excluded from the

922(g)(1) [and (d)(1)] firearms prohibition[s] are convictions for ‘business practices’ that require

proof of direct competitive harms.” Id. at 12 (emphasis added).

However, any strict application of an elements requirement would be inconsistent with the

explicit terms of the business practices exception. The three enumerated offenses are not generic

common law offenses reducible to specific elements that comprise the crime. Cf. Taylor v. United

States, 495 U.S. 575, 598–99 (1990) (explaining that in a categorical approach sentencing courts

look to the elements of the prior offense and compare them to the elements of the “generic” Armed

Criminal Career Act crime). The enumerated categories of offenses—antitrust violations, unfair

trade practices, and restraints of trade—each contain multiple, distinct offenses comprised of

varying elements. Antitrust violations, for example, may encompass price-fixing, bid-rigging, and

market allocation. Unfair trade practices may embrace an incalculable number of offenses—“[i]t

is impossible to frame definitions which embrace all unfair practices” because “[t]here is no limit

to human inventiveness in this field.” FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 240 (1972)

(citation omitted).

14 The common thread between the enumerated offenses is that they are commercial crimes

intended to address economic harm to competitors or consumers—not that they require proof of

such harm as an element of the offense. Most criminal antitrust violations, for example, are

considered to be per se harmful to competition and consumers and require no actual proof of injury.

See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224 (1940) (“Proof that a

combination was formed for the purpose of fixing prices and that it caused them to be fixed or

contributed to that result is proof of the completion of a price-fixing conspiracy under [section 1

of the Sherman Act].”) The fact that a business practices offense does not have as an element

proof of harm to consumers or competition therefore cannot definitively determine that it is not

within the business practices exception in § 921(a)(20)(A).

This is not to say that the elements test is not a useful tool in a court’s statutory

interpretation arsenal. Should a predicate offense relating to the regulation of business practices

satisfy this test, it would be clear that the violated statute intends to address economic harm to

consumers or competition. But it would be incongruous to require a predicate offense to pass a

test that the enumerated offenses themselves do not meet.

The Court therefore finds persuasive the Eighth Circuit’s approach in Stanko and adopts

its method of examining both the primary purpose and the elements of the predicate business

practices offense to determine whether an offense “pertain[s] to antitrust violations, unfair trade

practices, restraints of trade, or other similar offenses.” 6 The Eighth Circuit has not made clear,

6 Reyes specifically argues that his offenses “pertain to unfair trade practices or, at a minimum, are similar to such offenses.” Pl.’s Opp’n at 11, 16. But the Eighth Circuit’s approach applies to analyses of both offenses that “pertain to unfair practices” and offenses that are “similar to antitrust violations, unfair trade practices, or restraints of trade collectively.” Stanko, 491 F.3d at 415; see also Miller, 678 F.3d at 651–53 (applying purpose and elements analysis to determine whether predicate offense “pertains specifically to unfair trade practices”). This is consistent with the purpose of the business practices exception test: to identify offenses that share the same qualities as the offenses enumerated in § 921(a)(20)(A). Hence, a separate examination of whether Reyes’s securities offenses are “unfair trade practices” is unnecessary. 15 however, whether this method requires a predicate business practices offense to satisfy both the

purpose and elements prongs of the analysis to be considered a qualifying offense. In Stanko, the

predicate convictions did not satisfy either prong and hence there was no need to address whether

satisfaction of just one component of its approach would be sufficient. See Stanko, 491 F.3d at

418–19 (finding FMIA did not have qualifying primary purpose or elements); see also Miller, 678

F.3d at 653 (same as to fraud statute). But the court cited approvingly cases that exclusively relied

on a consideration of the elements, Stanko, 491 F.3d at 415 (citing Dreher, 115 F.3d at 332–33,

and Meldish, 722 F.2d at 27–28), as well as a case that exclusively relied on an analysis of the

statute’s purpose, see id. (citing McLemore, 792 F. Supp. at 98). Moreover, as discussed, a

business practices offense may fall within the business practices exception even if it does not

require proof of economic harm as an element. The Court therefore concludes that an offense

relating to the regulation of business practices qualifies under the business practices exception if

an examination of either its primary purpose or the elements of the violation reveals that the offense

statute is designed primarily to address economic harm to consumers or competition.

B. Examination of Reyes’s Predicate Offenses

Finally, then, the Court turns to whether Reyes’s three predicate offenses constitute

offenses excluded by § 921(a)(20)(A) from the felon-in-possession statute. All three, the Court

concludes, do.

1. Examination of the Elements

The Court begins its analysis by examining whether Reyes’s predicate business practices

offenses have as an element economic harm to competition or consumers. Reyes was convicted of

(1) securities fraud, (2) falsifying corporate books and records, and (3) making false statements to

accountants—none of which required the government to prove an effect on competition or

16 consumers. See Reyes, 660 F.3d at 459. Although his convictions for securities fraud and making

false statements required the government to prove that Reyes misstated or omitted material facts,

see id. at 668; 17 C.F.R. § 240.13b2–2, the government was not required to prove the violations

caused actual economic injury. Moreover, his conviction for falsifying corporate books and

records did not even require proof of materiality. See 15 U.S.C. § 78m(b)(2)(A) (requiring

securities issuers to “make and keep books, records, and accounts which, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the issuer”). Hence,

each of his offenses fails the elements prong of the business practices exception test.

2. Primary Purpose

This failure is not fatal, however, so long as the violated statute has the requisite primary

purpose. The Court therefore proceeds to the second prong of its business practices exception

analysis: discerning the primary purpose of the laws and regulations Reyes violated. Because an

analysis of the primary purpose of the overarching statute may illuminate the more specific

purpose of the provisions Reyes violated, the Court will begin with the Exchange Act.

i. The Securities Exchange Act of 1934

“Examination of purpose is a staple of statutory interpretation[.]” McCreary Cnty. Ky. v.

Am. Civil Liberties Union of Ky., 545 U.S. 844, 861 (2005). This inquiry does not require

“psychoanalysis of a drafter’s heart of hearts,” but instead relies on objective indicia of the law’s

purpose. Id. at 862. “The eyes that look to purpose belong to an ‘objective observer,’ one who

takes account of the traditional external signs that show up in the ‘text, legislative history, and

implementation of the statute,’ or comparable official act.” Id. (quoting Santa Fe Indep. Sch. Dist.

v. Doe, 530 U.S. 290, 308 (2000)). Because laws are not enacted in a vacuum, the “plain meaning

17 of the statute’s words [is] enlightened by their context” and “the specific sequence of events

leading to passage of the statute.” Edwards v. Aguiliard, 482 U.S. 578, 594–95 (1987).

Here, the history and stated purpose of the Exchange Act clearly indicate that the statute

was primarily intended to prevent economic harm to investors. Following rampant abuses in the

sales of securities and the subsequent crash of the stock market in 1929, Congress enacted the first

federal laws specifically regulating securities. The Securities Act of 1933 was enacted “[t]o

provide full and fair disclosure of the character of securities sold in interstate and foreign

commerce, and through the mails, and to prevent frauds in the sale thereof, and for other purposes.”

48 Stat. 74, 74 (1933). One year later, Congress enacted the Exchange Act, which established the

SEC and was intended “[t]o provide for the regulation of securities exchanges and over-the-counter

markets operating in interstate and foreign commerce and through the mails, to prevent inequitable

and unfair practices on such exchanges and markets, and for other purposes.” 48 Stat. 881, 881

(1934). Together, these Acts regulated the business practices that had led to financial ruin for

thousands of investors.

This new statutory scheme was intended not only to redress actual economic harm to

investors, but also proactively to prevent the occurrence of such harm in the future. To do so, the

Exchange Act imposed disclosure requirements, which serve as prophylactic measures to protect

investors from incomplete market information. See, e.g., 15 U.S.C. § 78m(b)(2) (requiring

securities issuers to maintain reasonably detailed records). “The theory behind th[is] federal

regulatory framework is that investors are adequately protected if all aspects of the securities being

marketed are fully and fairly disclosed[.]” 3 James D. Cox & Thomas Lee Hazen, Cox & Hazen

on Corporations 1582 (2d ed. 2003); see also Edward J. Balleisen, Fraud: An American History

from Barnum to Madoff 249–252 (2017) (describing the history of the development of the federal

18 securities laws and noting “their central aim was to construct a new set of norms and practices

about communicating truthful financial information”). The Exchange Act therefore regulates not

only conduct that has caused or could cause consumer harm but also conduct that may in the

aggregate lead to increased risk of economic loss by investors. Thus, like the statutes referenced

in the business practices exception, the Exchange Act “lay[s] down a scheme of acceptable and

unacceptable behavior by imposing direct restraints against certain business procedures[] and

requirements and regulations for the carrying out of a business enterprise” for “the purpose of

protecting the consumer while promoting appropriate competitive business and pricing practices.”

United States v. Kruckel, Crim. A. No. 92-611(JBS), 1993 WL 765648, at *16 (D.N.J. Aug. 13,

1993).

Although not determinative,7 the Exchange Act’s placement in the United States Code also

suggests that it is similar to the laws violated by the enumerated business practices offenses. The

Act was codified in Title 15 of the United States Code, which pertains to “Commerce and Trade,”

and includes both the Sherman Antitrust Act, 15 U.S.C. §§ 1–7, and laws governing unfair trade

practices, see, e.g., Federal Trade Commission Act, 15 U.S.C. §§ 41–58. Its placement in Title 15

serves as additional evidence that violations of the Securities Exchange Act share some family

commonality with the Title 15 offenses enumerated in § 921(a)(20)(A). See McLemore, 792 F.

Supp. at 98 (finding odometer rollback qualified as an “unfair trade practice” under

§ 921(a)(20)(A) because the offense was located in Title 15 and was intended to “protect

7 The United States Code is prepared and published by the Office of the Law Revision Counsel of the U.S. House of Representatives, not by Congress. See Preface, United States Code, at v. (1934 ed.) (explaining that the U.S. Code is a compilation of the law prepared by a committee of the House of Representatives). Hence, while a statute’s placement in a particular title may indicate it is generally thought to share common qualities with other statutes in that title, it is not determinative of whether Congress itself viewed the statutes as similar. 19 consumers from the annual $2 billion cost to car buyers who overpaid for cars due to the cars’

understated mileage”).

The statute’s text and history, as well as its placement within the U.S. Code, thus reflect

only one singular purpose: the Exchange Act “was intended principally to protect investors against

manipulation of stock prices through regulation of transactions upon securities exchanges.” Koch

v. SEC, 793 F.3d 147, 150 (D.C. Cir. 2015) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185,

195 (1976)); see also Basic Inc. v. Levinson, 485 U.S. 224, 230 (1988) (“The 1934 Act was

designed to protect investors against manipulation of stock prices.”). It is therefore clear that the

purpose of the Act as a whole is to regulate business practices in order to protect investors—i.e.,

purchasers of securities in the securities market—from economic harm.

ii. Reyes’s Predicate Convictions

Although it is apparent that the federal securities statutory scheme as a whole is intended

to protect investors, Reyes’s specific predicate convictions must themselves qualify as excluded

offenses under the business practices exception. See Miller, 678 F.3d at 652 (examining the

purpose of the specific violated statutory provision). The Court therefore examines the specific

violated provisions to determine whether each business practices offense has as its primary purpose

the protection of investors.

Reyes was convicted of securities fraud and making false filings with the SEC in violation

of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b–5. Reyes, 660 F.3d at 460. Under 15 U.S.C.

§ 78j(b), it is unlawful “[t]o use or employ, in connection with the purchase or sale of any security

. . . any manipulative or deceptive device or contrivance in contravention of such rules and

regulations as the Commission may prescribe as necessary or appropriate in the public interest or

for the protection of investors.” This provision is further defined by 17 C.F.R. § 240.10b–5 as

20 prohibiting “any untrue statement of a material fact or [omission of] a material fact . . . in

connection with the purchase or sale of any security.” Hence, to convict Reyes under these

provisions, the government was required to prove that he made “a (1) misleading (2) statement or

omission (3) of a ‘material’ fact (4) . . . with scienter.” United States v. Smith, 155 F.3d 1051,

1063 (9th Cir. 1998).

The explicit text of 15 U.S.C. § 78j(b) and the materiality requirement of the securities

fraud offense together demonstrate that the securities fraud and false filing statute that Reyes

violated was primarily intended to protect investors from economic harm. The text of 15 U.S.C.

§ 78j(b) provides that regulations under that provision are limited to those made “for the protection

of investors” or “in the public interest.” 15 U.S.C. § 78j(b) (emphasis added). To the extent that

provisions “made ‘in the public interest’” could, in theory, be distinguishable from those made

“for the protection of investors,” the Court need not and does not express an opinion; here, the

materiality element of SEC Rule 10b–5 confirms that the regulation Reyes violated was made “for

the protection of investors.” A fact is only “material if there is a substantial likelihood that a

reasonable investor would consider it important in making a decision” by “alter[ing] the ‘total mix’

of information made available.” Reyes, 660 F.3d at 468 (emphasis added). A Rule 10b–5 offense

is therefore explicitly tied to protecting the investor’s interest in having complete information to

minimize economic risk. Thus, even though a Rule 10b–5 conviction does not require the

government to prove as an element that any investor in fact “was affected” by relying on the

information, or that the misrepresentation resulted in economic loss—a prerequisite of satisfying

a strict application of the elements test—the language of 15 U.S.C. § 78j(b) and of the Rule 10b–

5 offense’s materiality element confirm that the predicate securities fraud and false filing offenses

have the requisite primary purpose of preventing adverse effects on securities purchasers.

21 Similarly, Reyes’s convictions for making false statements to auditors under 17 C.F.R.

§ 240.13b2–2 required proof that he knowingly made a “materially false or misleading statement

to an accountant.” See United States v. Goyal, 629 F.3d 912, 916 n.6 (9th Cir. 2010) (noting that

the statements must be “knowingly” made). To convict Reyes, the jury was required to find that

the false statements were “capable of misleading investors.” United States v. Reyes, 577 F.3d

1069, 1076 (9th Cir. 2009). This too confirms that 17 C.F.R. § 240.13b2–2 was primarily intended

to protect investors.

Finally, Reyes was convicted of falsifying corporate books and records, which required a

finding that he knowingly failed to “make and keep books, records, and accounts, which, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the

issuer.” 15 U.S.C. § 78m(b)(2)(A); see also 17 C.F.R. § 240.13b2–1 (“No person shall directly or

indirectly, falsify or cause to be falsified, any book, record, or account[.]”). Like the other

offenses, this requirement supports the Exchange Act’s disclosure system, which is “based on the

premise that ‘No investor can safely buy or sell securities without having an intelligent basis for

forming his judgment as to the value of the securities he buys or sells.’” Promotion of the

Reliability of Financial Information and Prevention of the Concealment of Questionable or Illegal

Corporate Payments and Practices, Exchange Act Release No. 15570, 1979 WL 173674, at *8

(Feb. 15, 1979) (citation omitted). As such, the SEC determined that the bookkeeping provision

was “‘necessary or appropriate’ in the public interest, for the protection of investors and to insure

fair dealing in securities.” Id. (emphasis added).

To provide even greater protection to investors, the SEC rejected the imposition of a

materiality standard for the bookkeeping provision. Id. at *9 (noting the SEC’s “concern that a

limitation concerning ‘material’ falsity would unduly narrow the scope of the rule and result in an

22 unwarranted diminution of investor protection”). Thus, issuers are required to provide all

information in reasonable detail, even if such information would not be considered important by a

reasonable investor. Because violations of the bookkeeping provision could lead “to the

concealment of material information that should be disclosed in periodic reports or to purchasers

and sellers of the issuer’s securities,” the SEC imposed the bookkeeping requirement as a separate,

antecedent measure to ensure that investors remained fully informed and able to minimize the

economic risks associated with overvalued stock. Id. at *10. Hence, it is clear that the primary

purpose of the bookkeeping provision was to protect investors from economic harm.

Each of Reyes’s predicate business practices offenses, then, possesses the requisite primary

purpose under the business practices exception. There may be instances in which a statutory

provision’s primary purpose is not so easily divined. See Sissel v. U.S. Dep’t of Health and Human

Servs., 799 F.3d 1035, 1054 (D.C. Cir. 2015) (Kavanaugh, J., dissenting) (noting “it is extremely

difficult for a Court to identify one predominant purpose”). This, however, is not such a case.

Here, it is clear that the violated provisions regulate business practices by securities issuers to

prevent deceptive half-truths or affirmatively misleading statements regarding the stability of a

company or the value of its stock. Such laws and regulations primarily ensure that investors have

sufficient information to make informed decisions to minimize their risk of economic loss—i.e.,

they are primarily concerned with protecting securities purchasers through the regulation of

business practices.

* * *

The Court concludes that each of Reyes’s predicate offenses satisfies the primary purpose

prong of the business practices exception test and therefore is excluded from the definition of

23 “crime[s] punishable by imprisonment for a term exceeding one year.” 8 The business practices

exception in § 921(a)(20)(A) excludes from the felon-in-possession statute only predicate offenses

relating to the regulation of business practices that are designed to address economic harm to

competition or consumers. An offense relating to the regulation of business practices qualifies

under the exception if either its primary purpose or the elements of the violation demonstrate that

it was primarily intended to address such harm. While none of Reyes’s predicate convictions

required the government to prove as an element of the offense direct harm to competition or

consumers, the text and history of the Exchange Act generally, and an examination of each of

Reyes’s predicate offenses specifically, evince that those offenses regulate business practices

primarily to protect securities purchasers from economic harm. Hence, each of Reyes’s predicate

offenses “pertain[s] to antitrust violations, unfair trade practices, or other similar offenses relating

to the regulation of business practices” under § 921(a)(20)(A) and thus does not trigger the

application of the felon-in-possession statute.

Because the Court concludes that § 922(d)(1) and (g)(1) are not applicable to Reyes, the

Court will not consider the constitutional challenges he raises in the alternative. The Court will

also deny Reyes’s motion for leave to file a surreply. A separate order has been issued on this

date.

/s/ JOHN D. BATES United States District Judge Dated: September 28, 2018

8 Because the Court finds that Reyes’s predicate offenses fall within the business practices exception, the Court will not consider Reyes’s additional argument that any distinction between § 921(a)(20)(A)’s enumerated offenses and his securities violations would pose constitutional problems. See Pl.’s Opp’n at 17. 24